Olam Says No Insolvency Risk as Company Rebuts Muddy Waters

A war of words between Olam and Block began when the Muddy Waters’s research director Carson Block accused the Singapore-based company of booking profits on transactions before it’s clear how they would work out over time. Photographer: David Paul Morris/Bloomberg

Nov. 28 (Bloomberg) -- Olam International Ltd. said it
faces no threat of insolvency after Muddy Waters LLC likened it
to Enron Corp. and said the commodity trader runs a high risk of
failure.

The company has the capacity to meet its debt obligations
of S$1.5 billion ($1.2 billion) in the next 12 months, in
addition to its planned spending, Singapore-based Olam said
today in a statement. The conclusions Muddy Waters made about
Olam’s solvency are incorrect, Olam said.

Shares of Olam, one of the world’s top three coffee
traders, declined 3.9 percent to S$1.50 at the close of trade in
Singapore and are down 14 percent since Muddy Waters founder
Carson Block first questioned the company’s finances and
accounting practices at a London conference on Nov. 19. The
short seller rated Olam a strong sell in a 133-page report
released on its website yesterday.

“It’s hard for Olam to fully disprove the concerns until
it can show positive free cash flow,” Vincent Fernando, an
analyst at Religare Capital Markets in Singapore, said by phone.
He cut his rating on the stock to sell from buy today. “That’s
the only way to definitively put it to rest, otherwise this will
continue to haunt them.”

Olam’s $500 million of unrated, 5.75 percent, five-year
notes issued at par in September have tumbled to 85.059 cents on
the dollar to yield 9.716 percent as of 5:02 p.m. in Singapore,
according to prices compiled by Bloomberg. The notes were
yielding 5.916 percent at the beginning of the month.

False and Misleading

Muddy Waters said it values Olam on a “liquidation basis,
because our opinion is that it is likely to fail.” The research
firm says Olam uses non-cash accounting gains to boost its
earnings, has been “burning cash” and will need to raise or
refinance as much as S$4.6 billion of debt over the next year to
remain solvent.

The allegations “are false and misleading,” Olam, which
counts Singapore’s Temasek Holdings Pte as its second-largest
shareholder, according to Bloomberg data, said today. “We will
continue to vigorously defend the reputation of the company.”

Olam sued Muddy Waters and Block in the Singapore High
Court on Nov. 21, calling Block’s remarks in London malicious
falsehoods. The company is seeking unspecified damages, costs
and an injunction against republication of the comments.

“We believe that the report’s assertions are motivated to
distract and create panic amongst our continuing shareholders,
bond holders and creditors, to enable Carson Block and his
associates to benefit from their short positions in Olam
securities,” Olam said today in a statement.

Capital Projects

Muddy Waters’s report is “premised on Olam’s insolvency,
which in our opinion is unlikely unless there is outright
fraud,” Eugene Ng, an analyst at UOB-Kay Hian Holdings Ltd. in
Singapore, said in a note today.

While Olam has said its capital projects will have “high”
returns on investment as they mature, Muddy Waters has found
many are performing “very poorly,” Block said yesterday in an
interview with Stephanie Ruhle and Tom Keene on Bloomberg
Television’s “Market Makers.”

Block said he had “shorted” Olam, seeking to profit by
selling borrowed shares now and buying them back later at a
lower price.

Track Record

“We have a proven track record of unlocking value through
acquisitions and pursuing profitable organic growth,” Olam said
today in a 45-page response to the Muddy Waters report. “Olam
has been explicit not only on its capex strategy, but has also
notified the markets on every material investment.”

The company is targeting annual profit after tax of $1
billion by 2016. Net income in the 12 months through June was
S$370.9 million, 14 percent lower than a year earlier. Olam is
well “on track” toward achieving its target, it said today.

Olam will remain free cash flow negative until 2015 as the
company is in an “investment ramp up phase,” Chief Executive
Officer Sunny Verghese said Nov. 14.

The company supplies 21 products from cocoa to rubber from
65 countries to 12,300 customers. It’s one of the world’s top
six cotton traders. Temasek holds a 16 percent stake in Olam,
according to data compiled by Bloomberg.

Stephen Forshaw, a spokesman for Temasek, said yesterday in
a text message it’s “more appropriate for Olam to comment on
this report.”

Asset Heavy

“Olam’s ‘asset heavy’ strategy appears to be an off-the-rails capex and acquisition binge,” according to Muddy Waters,
who said the “vast majority of the acquisitions we have
researched are of low-quality assets that appear to bring little
more than cosmetic benefits.” It said both Enron and Olam were
“black boxes” to analysts and investors.

Muddy Water’s claim that Olam makes acquisitions for the
purpose of boosting profits with non-cash accounting gains
“could not be further from the truth,” the company said. “In
the past few years, Olam saw an opportunity post the global
financial crisis of acting counter-cyclically and acquiring
assets and businesses at a deep discount to their fair value.”

Muddy Waters has also targeted New Oriental Education &
Technology Group Inc., Fushi Copperweld Inc. and Focus Media
Holding Ltd. Block said yesterday that he’s lost interest in
betting against Chinese stocks.

Successful Bets

Block, 36, research director of Los Angeles-based Muddy
Waters, had successfully bet against Chinese companies that
trade in North America after raising doubts about their
accounts. One target, tree-plantation operator Sino-Forest
Corp., slumped 74 percent before eventually filing for
bankruptcy protection in March.

Focus Media, the Shanghai-based advertising company that
Block claims overstated its network, posted a 22 percent gain in
its American depositary receipts this year, notwithstanding the
allegations. It’s now the subject of a $3.5 billion buyout offer
by a group of private-equity firms including Carlyle Group LP.
The deal would be China’s largest leveraged buyout.